Serbia Avoids Snap Election in Accord Over Smaller Coalition

Serbian political leaders averted early elections after the country’s largest party agreed to the prime minister’s cabinet shuffle that led to the ouster of a junior partner and shaved the government’s majority to one seat.

The poll-leading Progressive Party accepted a decision by Prime Minister Ivica Dacic to oust Finance Minister Mladjan Dinkic and his United Regions of Serbia from the ruling coalition, according to Belgrade-based Tanjug news agency.

Elections aren’t “in the interest of the people because too many things need to be improved and done and the elections would cause additional instability,” Vucic told reporters, according to a video of the press conference provided by Tanjug.

The power struggle between the Progressives and Dacic’s Socialist Party emerged in the past week, raising concern that political uncertainty will derail the country’s progress toward European Union membership and its work with the International Monetary Fund to stabilize the economy.

The yield on the government’s dollar bond maturing in 2021 rose 43 basis points, or 0.43 percentage point, to 6.9 percent today by 1:33 p.m. in Belgrade, the highest in a month, according to data compiled by Bloomberg. The dinar traded at 113.8730 per euro from 113.829 yesterday after dropping as much as 0.4 percent earlier today. The central bank sold euros to stem its decline, according to three traders who asked not to be unidentified in line with bank policies.

Cabinet Review

The names of new cabinet officials will be known after Aug. 20, while parliament will hold a session to approve it by Aug. 27, Vucic said. He will review the effectiveness of the new cabinet within six months, he said.

“The situation is far from being resolved,” Marko Blagojevic, the program director at the Center for Free Elections and Democracy, said in a phone interview. “They are starting from scratch, making a totally new cabinet and gave themselves another month.”

Dacic and Vucic are allies from the 1990s when their parties were led by former Serbian strongman Slobodan Milosevic and nationalist leader Vojislav Seselj, during a decade marked by wars, sanctions, bouts of hyperinflation and currency devaluation.

World Bank

The political crisis will put the World Bank’s $200 million loan to support Serbia’s budget on hold for three to five months as the new cabinet and finance minister need to be appointed, the World Bank’s resident representative, Loup Brefort, was cited by NIN magazine today as saying. Approval will also depend on the new government’s commitment to sell or shut down 179 state companies with more than 54,000 workers,

Dinkic, once an opposition leader in a fight to topple Milosevic and the first central bank governor after the fall of Milosevic in 2000, tried to quell the tension in the cabinet by offering to split the Finance and Economy Ministry and handing the economy portfolio over to the Progressives.

“If the cabinet won’t have us as partners, we will be a constructive opposition,” Dinkic said yesterday. “Dacic is simply defending his prime minister’s post.”

Dinkic will attend today’s cabinet meeting because he continues his duties until a replacement is approved in a parliamentary vote, government spokesman Milivoje Mihajlovic said by phone.

Narrower Majority

Dinkic’s departure leaves the government with 126 seats in the 250-member parliament, down from 140, according to a breakdown of seats on the parliament’s website. That threatens to derail government policies that led to a promise from the EU to start membership negotiations in January to join the bloc.

“Political turmoil is an important credit negative for the country, not just because it creates uncertainty about the future leadership of Serbia, but perhaps more importantly because the country is currently at a critical juncture,” Abbas Ameli-Renani, an emerging-market strategist at Royal Bank of Scotland Group Plc in London, said in an e-mail today.

The cost to insure Serbian government bonds against non-payment for five years using credit default swaps rose to 390.93 points today from 389 points yesterday, still below the July 4 high of 396.3 points, data compiled by Bloomberg show.

The new cabinet together with monetary policy makers will need to shore up Serbia’s $37 billion economy, fight inflation and shield the dinar from market turmoil. The inflation rate fell to 9.9 percent in May, dipping below 10 percent for the first time in nine months.

Budget Problems

The budget gap is expected to top at least 6 percent of gross domestic product this year, down from 7.3 percent in 2012. The current-account deficit will reach 8.7 percent of GDP according to IMF forecasts.

The economy grew 0.7 percent in the second quarter, after a 2.1 percent expansion in the first three months, according to official statistics.

Slower growth is expected to weigh on budget revenue, “keeping the budget deficit performance in focus,” Timothy Ash, the chief emerging-market economist at Standard Bank Group Ltd. in London, said in an e-mail.

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